by Joao Santos, Federal Reserve Bank of New York There’s ample evidence that securitization led mortgage lenders to take more risk, thereby contributing to a large increase in mortgage delinquencies during the financial crisis. In this post, I discuss evidence from a recent research study I undertook with Vitaly Bord suggesting that securitization also led …
The solution for US and European banks is the same: Government deposit insurance should only be available for banks that manage their own loans and do not trade on their own behalf.
In the simplest terms, the housing bubble was caused by a flood of liquidity chasing mispriced risk.
Securitization of mortgages has suffered from two aspects. First, risk was not properly recognized. Second, legally required filings were not completed. Both of these problems are reviewed.